TaxPlanning: International tax issues during the pandemic

This article first appeared in Wealth, The Edge Malaysia Weekly, on November 30, 2020 - December 06, 2020.
TaxPlanning: International tax issues during the pandemic
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Pursuant to the Covid-19 pandemic declared by the World Health Organization (WHO) early this year, countries all over the world took the drastic and sudden steps of restricting people’s movement — variously known as lockdown, Movement Control Order (MCO), circuit-breaker and so on — to contain the spread of the virus. Territorial borders were closed and flights banned.

This resulted in people being stuck in the physical locations they were in at the time the said movement restrictions were imposed at short notice. These people were on vacation, work assignments or short visits. The movement restrictions resulted in their having to remain where they were, unable to return to their places of origin or normal base. This led to “temporary absence” from their normal base or “temporary presence” in their host locations.

These unintended and unplanned presence and absence have given rise to tax issues as follows:

1.     Tax residence in Malaysia

2.     Place of exercise of control and management

3.     Place of exercise of employment

4.     Creation of a permanent establishment (PE) for an enterprise or ­entity

Each of the above issues will affect the tax treatment of the persons or the enterprise they represent.

On Oct 7, the Inland Revenue Board (IRB) issued an updated “Frequently Asked Questions (FAQs) on international tax issues due to Covid-19 travel restrictions” to state its position with regard to the potential tax treatment in given/envisaged situations.

In this article, I will explain the above tax issues to provide context to the questions, and cite IRB’s positions as stated in the aforementioned FAQs.

1. Tax residence in Malaysia

The tax residence of an individual is basically determined by the number of days he is physically present in Malaysia in a calendar year. An individual is said to be a tax resident of Malaysia for a calendar year if he is physically in Malaysia:

• for an aggregate of 182 days or more in that calendar year; or

• for a period of less than 182 days in that calendar year, and that period is linked to another period of 182 or more consecutive days in the calendar year immediately before or immediately following the first-mentioned calendar year; or

• for an aggregate of 90 days or more in that calendar year, and for the three out of four immediately preceding calendar years, he was resident or he had spent at least 90 days in Malaysia.

An individual who is a tax resident of Malaysia is eligible for a range of personal tax reliefs, double tax treaty benefits, tax rebates, is subject to income at scale/progressive rates from 0% to 30%, and enjoys certain tax exemptions. A non-resident individual does not qualify for any personal reliefs, treaty benefits or tax rebates, and is subject to income tax at the fixed rate of 30%.

The travel restrictions pursuant to Covid-19 lockdown measures have resulted in individuals not being able to return to Malaysia, or not being able to leave Malaysia. The question arises: In determining the days of physical presence in Malaysia, how will this forced absence or presence in Malaysia be counted?

Below are examples sourced from the FAQs published by the IRB:

2. Place of exercise of control and management

A company’s tax residence status in Malaysia is established if at any time in the calendar year, the control and management of the company is exercised in Malaysia.

“Control and management” is exercised when the board of directors (BoD) meets. Hence, the place of exercise of control and management is the country where the BoD meets.

There are some differences in tax treatment of a resident company vis-ã-vis a non-resident company. (Note: We will not discuss the differences in this forum.)

What is the impact if the BoD meetings are necessarily held in Malaysia, or could not be held in Malaysia because of the location of the board members during the movement restriction period?

Let’s see what the FAQs say:

3. Place of exercise of employment

Employment income is subject to tax in Malaysia if it is derived from Malaysia. Employment income is derived from Malaysia when the individual exercises his employment in Malaysia.

So, we can immediately see the significance of the place where an individual carries out his employment duties and responsibilities.

4. Creation of a permanent establishment (PE) for an enterprise or entity 

Under international tax principles, an enterprise from country A trading with persons in country B is not taxable in country B until and unless the enterprise has a sufficient level of business presence in country B to be said to have a permanent establishment (PE) in country B.

One of the ways for the enterprise to create a PE in country B is by having its employees or dependent agents acting on its behalf, concluding contracts, or otherwise carrying out core/principal business activities in country B.

If an enterprise from a foreign country has employees/personnel present in Malaysia because of the movement restriction order, and the employees perform their duties from their Malaysian location, does the enterprise run the risk of creating a PE in Malaysia?

Conclusion 

I applaud the IRB for adopting a pragmatic and reasonable approach to the tax issues that have thus arisen.


Yong Siew Chuen has wide experience in Malaysian taxation. She now focuses on tax training and coaching. Comments: [email protected].